Running Cash Flow #s by the Four Square Method - Deal or Bust?

Question

Hey BP Community,

I have been diligently running cash flow and Cash-on-Cash return #s from many duplexes and triplexes in the Chicago and Chicago suburban areas. To my dismay, I have found that as someone who wants to live in one of the units (house hack) that significantly reduces my cash flow to next to nothing, or to nothing, or even negative earnings.

BP Community - is this the best way for me to be running these #s, or is this just the new normal and the "live for free" model has slowly disappeared?

Thank you!

Account Closed · Answer

Hey Jacob! Welcome to the real estate rollercoaster! Living the dream of house hacking can be a budget buzzkill, right? Chicago's a tough market, no doubt. The "live for free" vibe might need some CPR these days. But don't throw in the towel just yet. Maybe tweak your strategy – consider different areas or property types. Get creative with financing, too. It's like dating; you might not find 'the one' on the first date. Keep crunching those numbers, and you'll find a sweet spot. The game's changed, but there's always a loophole or two. Happy house hacking, dude!

Evan Polaski · Answer

@Jacob Lopez, as others noted, house hacking is not really a cash flow play, in a traditional sense, since you are effectively removing 33-50% of the property from the rent roll.

If you plan on living in a unit for a couple years, then holding longer as an investment, I would underwrite it as an investment.  If it makes sense to buy as an investment, then it is likely worth buying as a house hack, assuming it is a property/neighborhood you want to live in.

From a current cash flow perspective, the analysis should result in better cash flow for YOU.  It still may be negative, but so is paying rent to your current landlord.  So, if you are paying, say $1,500/mo in rent now.  When you buy this triplex, you are only our of pocket $500/mo for a similar quality of life, that equates to "$1,000 net cash cash flow to you", since you are effective saving $1,000/mo versus your current living situation.

Jonathan Klemm · Answer

@Jacob Lopez you aren't alone in numbers not penciling out here in Chicago, but in my opinion, getting started period is way more important than having a ton of cash flow.

I always look at house hacking vs. renting, not from a cash flow perspective but just simply whether or not I am paying less rent than I normally would be living in that area.

The better question is when you move out in a year or two will it be positive so that you arent coming out of pocket as you move forward...

No matter what buying in good areas will always be a great move 5-10 years from now...you just need to figure out if you can out last the beginning stages.

Caleb Brown · Answer

House hacks rarely will ever cashflow. They are meant to reduce your living expenses to save money while getting into a property way under the 20% down threshold. Once you move out then it will have cashflow. The benefit of house hacks is you can do it every year and use low money down. After a few you'll have properties under your belt to launch you into investing. It's a slow but steady way to do it

James Carlson · Answer

@Jacob Lopez

You're not wrong. Duplex house-hacking hasn't cash-flowed in Denver or Colorado Springs for years, even when interest rates were low. Rent-by-the-room house-hacking could cash flow. I imagine it's the same in Chicago.

Unfortunately, interest rates have put those days in the past as well.

But that's not a reason to not invest. Offset as much as you can, save up as much as you can, and repeat in a year or two while renting out the previous place.

I think it's similar to dollar cost averaging in the stock market. Put in a set amount at set intervals to minimize losses from buying at imopportune times.

Robert Rixer · Answer

I've said this a number of times before, house-hacking sounds good on paper but rarely pans out as people expect. Namely high prices compared to returns in multifamily and also high interest rates. The biggest thing that few people talk about is the ideal investment property and the ideal place to live rarely overlap. You will almost always sacrifice one for another. I would bet you could make house-hacking numbers work in an the absolute worst neighborhood in your city, but chances are you're not willing to live there.

Melanie P. · Answer

You should consider the rent you will not be paying in your analysis of these deals. Your expectation should be that you will be moving in 1-3 years and renting that unit. If it seems the project will cashflow at that time, it's probably a safe bet.

You should not expect to cash flow while not paying rent. You will pay some in and (hopefully) this will be less than you would have paid in rent, plus you are building equity/appreciation.

Joshua Christensen · Answer

Great question.

1. Do you have a housing payment currently?  If that goes away in your house hack, I'd factor that into your cash flow.

2.  In a house hack, it's your residence so the numbers aren't going to work like a normal evaluation.

3. You're making a buying decision.  You have to decide if the future after you move and it becomes a 100% revenue property, is it worth the purchase?  Don't over think it.

There's never going to be a "perfect" deal.  After you buy, things happen that blow your original analysis for better or worse.  Real estate is a fluid industry.

the more you analyze, the more reasons youll talk yourself out of action.  Be smart and dont lose money on bad decisions.  At the same time theres a point you just have to take action.

John Warren · Answer

@Jacob Lopez early on, a lot of house hack buyers want to live for free AND get cash flow. This is highly unlikely for most folks since as a house hacker you are probably putting down in the 3.5-5% range. Instead, think about how much your monthly living expense will be compared to rent. that helps you figure out if this makes sense or not.

Running Cash Flow #s by the Four Square Method - Deal or Bust?

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